Tougher Times Ahead for Canada’s Big Banks

Canada’s banks are in for tougher times, a point underscored by a big New York ratings firm on Monday when it cut several credit ratings amid concern that record levels of Canadian consumer debt and high housing prices makes them more vulnerable than ever to a slowing economy.

TD begs to differ. The bank—Canada’s second-largest– remains one of the highest-rated banks globally. It points out that signs of improvement are emerging, yet Moody’s Monday cited the same concerns it raised when it first put the banks on review for potential downgrade in late October.

“We have seen moderating in consumer loan growth and a cooling of the housing market in line with recent government efforts to address the concerns that prompted the original review,” Stephen Knight, a TD spokesman, said in an email.

The banks’ backbone has been their domestic personal and commercial units. But the days of making easy money are over. After years of record mortgage volume growth in Canada, analysts are forecasting 2-4% personal and mortgage loan growth in 2013 and earnings per share growth of about 5% for the banks–half of last year’s rate.

“What has historically been the most predictable, the most reliable source of earnings growth for this group is not going to be nearly as robust in the near term,” Sumit Malhotra, a financial services analyst at Macquarie Capital Markets Canada Ltd., told Canada Real Time.

The banks are trying to limit margin erosion and tighten the leash on expenses. They had hoped for a reprieve, anticipating interest rates would rise later this year, but the Bank of Canada signaled last week a rate hike isn’t in the immediate future. Still, in tough times, they can lean on their oligopoly to keep customer fees high, or in their jargon, keep pricing rational.

Mr. Malhotra thinks the banks will be able to offset slowing consumer loan growth this year. “I think the question is, what if this goes on for a while?” he said.

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Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com